Tuesday, February 9, 2010

Heelys' Stock Builds In The Bad News

A few years ago, Heelys' footwear product for children was all the rage. The company had designed a sneaker with a removable wheel on the heel that had taken the consumer market by storm. Below is a demonstration of the dual-purpose footwear in action:

The company's 2006 IPO was accompanied by much fanfare, as the company had high hopes of expanding its markets and designing innovative new product lines. Consensus analyst estimates suggested the company would grow its earnings 20+% per year for the next five years. When the fad was exposed for what it was (i.e. sales began to drop, and insiders started selling) the stock price took a huge hit, falling from almost $40 to the $2 it is today.

However, it continues to hold much of the cash it took in as part of the IPO at a much higher price. The company trades for $58 million, but has $90 million in current assets (including almost $70 million of that in cash!) and just $11 million in liabilities.

Unfortunately, the company largely remains a one-trick pony. However, it appears to have cut its costs to adjust to the much lower revenue environment, as the company is now close to break-even levels on an operating basis. The company also recently settled a slew of lawsuits related to its IPO, as angry investors who lost a lot of money received some consolation (mostly from the company's insurance providers).

The risk of course, is that the company uses its large cash holdings on a foolish investment that never pays off. Fortunately, however, the company appears to have made no such plan. In fact, the company under new management has shown a willingness to return cash to shareholders, with a $1 dividend at the end of last year. If the company continues to make progress in cutting its costs, it may be more willing to dish out more of its cash holdings to shareholders in the near future. With a stock price of $2, and cash on hand of almost $3 per share, this could bode well for shareholders.

Disclosure: None


Anonymous said...

Hey saj! Dis luks like a gr8 deal, y havent u invested in it?(sorry, couldnt help asking) fully invested r v?

Ankit Gupta said...

They have 57.1M of cash after paying off all liabilities and placing $0 value on the rest of the business, and market cap is 60M. If you believe their other assets are worth something AND that they will cut SG&A, it could be a good deal, but those are two big if's that rely largely on management running the company very well and trimming staff on the way down.

Personally, I'm staying out of it because it just isn't cheap enough to excite me. If the price were cut in half or even 1/4th, I'd probably be interested.

Saj Karsan said...

Hi Anon,

It's not one of my favourites at this price, and I can only buy so many. I agree with Ankit that I would be more interested at a slightly lower price.